A version of this blog previously appeared on the KBKG website.

By Ian Williams, CPA

The IRS’s IR-2022-183 warns employers to be wary of third parties advising them to claim the Employee Retention Credit (ERC) when they may not qualify. The IRS included several red flags for CPAs and business owners. ERC mills, as the serial abusers of the credit are known, aggressively market these positions, so the IRS is pointing concerned CPAs and taxpayers to Form 3949-A, which can be used to report illegal tax-related activity related to ERC claims.  

Understanding the level of abuse in this area, the IRS is gearing up to audit ERC claims. Initial audit activity is underway, and the IRS’s approach is outlined below:  

• The IRS has 300 agents focused on ERC who have been through a training program.  
• The IRS is considering a voluntary disclosure program for anyone who thinks they were targeted by an ERC mill and erroneously claimed credits. This may relieve those taxpayers of penalties and interest.  
• While the IRS hasn’t published specifics on the process for determining which claims to audit, expect them to focus on larger claims initially. Also, expect additional scrutiny of shutdown claims outside of the industries most affected by COVID (e.g., restaurants, hospitality, etc.). Documentation should be maintained for any ERC claim.  

There is a discrepancy in the IRS statute of limitations for auditing ERC (five years) compared to the statute of limitations for amending business tax returns (three years). The IRS requires tax return wage deductions in the year associated with the ERC claim to be reduced to avoid getting a double benefit. This means taxpayers claiming ERC for a 2020 period will need to amend the corresponding 2020 tax return (2021 tax return for 2021 ERC claims) to make this adjustment and to either adjust net operating loss carryforwards or pay the additional tax resulting from this adjustment. Based on the current statutes, in the event of an IRS disallowance of an ERC claim in year four or five of the IRS audit statute, a taxpayer may have to pay back the credits, without having an opportunity to amend tax returns (which expired at three years) to reclaim the lost deductions. It will be several years before this has any impact, so we hope the IRS will proactively address it.  

Conclusion  

There is an alarming amount of fraud in this area. CPAs and business owners should be wary of credit companies using mass-marketing techniques to contact them. Businesses should contact their CPA for a referral to a reputable firm with a proven record of dealing with IRS audits.  

Ian Williams, CPA, is a director for KBKG in Atlanta, specializing in research and development and employment tax credits. He can be reached at ian.williams@kbkg.com.  

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